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Corporate tax cuts, merger activity, and shareholder wealth
Journal article   Open access   Peer reviewed

Corporate tax cuts, merger activity, and shareholder wealth

Jennifer L. Blouin, Eliezer M. Fich, Edward M. Rice and Anh L. Tran
Journal of accounting & economics, v 71(1), 101315
Feb 2021
DOI: https://doi.org/10.1016/j.jacceco.2020.101315
url
https://openaccess.city.ac.uk/id/eprint/23751/1/DPAD-08February2020.pdfView
Accepted (AM)Open Access (License Unspecified),  Open

Abstract

Acquisitions Corporate tax deduction Financial constraints Firm performance
We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the U.S. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger. •We empirically examine the effect of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions (M&A).•Using difference-in-differences methods, we find that firms with higher DPADs execute more and better M&A deals on average.•The greater number and improved quality of deals is particularly true of all-cash deals.•Our results support predictions from neoclassical M&A theory and the theory of financial constraints.•We show that modest tax rate changes can have a substantial effect on acquisition activity and quality.

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25 citations in Web of Science
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Collaboration types
Domestic collaboration
International collaboration
Web of Science research areas
Business, Finance
Economics
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